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The Impact of Sales and Operations Planning Implementation on Supply Chain and Financial Metrics University of Tennessee, Knoxville TRACE: Tennessee Research and Creative Exchange Supervised Undergraduate Student Research Chancellor’s Honors Program Projects and Creative Work 12-2015 The Impact of Sales and Operations Planning Implementation on Supply Chain and Financial Metrics Matthew Nolte University of Tennessee - Knoxville, [email protected] Follow this and additional works at: https://trace.tennessee.edu/utk_chanhonoproj Part of the Operations and Supply Chain Management Commons Recommended Citation Nolte, Matthew, "The Impact of Sales and Operations Planning Implementation on Supply Chain and Financial Metrics" (2015). Chancellor’s Honors Program Projects. https://trace.tennessee.edu/utk_chanhonoproj/1904 This Dissertation/Thesis is brought to you for free and open access by the Supervised Undergraduate Student Research and Creative Work at TRACE: Tennessee Research and Creative Exchange. It has been accepted for inclusion in Chancellor’s Honors Program Projects by an authorized administrator of TRACE: Tennessee Research and Creative Exchange. For more information, please contact [email protected]. Chancellor’s Honors Program The Impact of Sales and Operations Planning Implementation on Supply Chain and Financial Metrics Author: Matthew Nolte Faculty Advisor: Dr. Mollenkopf December 2015 Table of Contents 1. Introduction to S&OP…………………………………………………..……Page 3 Scope of the Problem……………………………………….…….………….Page 4 2. Literary Review…………………………………………………..….....……Page 5 Old View………………………………………………………………..……Page 5 Modern S&OP……………………………………………………………….Page 5 Future of S&OP……………………………………………………………...Page 6 3. Methodology…………………………………………...……………….……Page 8 4. Case Analysis……………………………………...……………………..….Page 11 Company #1 – Newell-Rubbermaid…………………………………….…...Page 11 Company #2 – Heinz……………………………………………………..….Page 12 Company #3 – Weyerhaeuser……………………………….……….………Page 14 Company #4 – Whirlpool……………………………….…………………...Page 15 Cross-Case Analysis………………………………….……………………...Page 17 5. Appendix………………………………………….…………………………Page 19 6. Works Cited…………………………………….......…………………….…Page 22 2 Introduction to Sales and Operations Planning What is Sales and Operations Planning? Sales and Operations Planning, otherwise known as S&OP in industry, is a complex practice intended to align the goals of a company’s internal supply chain, finance, and sales organizations. Chart: Dr. Paul Dittman – University of Tennessee This process begins with the demand side of the organization generating a forecast and sharing it with the supply sides. Simultaneously the finance and supply organizations each create plans for the period’s financial goals and capacity constraints. These three core inputs along with qualitative feedback will be discussed and worked on by representatives and leadership from the three organizations until a mutually agreed-upon vision is identified for the company. This singular plan must take into account and balance the three input factors in order to best meet the goals of the company as a whole, considering the internal and external environments. This is an intentionally simple overview of S&OP as this study is not intended to be an instructional guide for using or implementing the process, but rather an analysis of its effectiveness. 3 Scope of the Problem Many consultants and companies have touted the benefits of S&OP and how it adds value to their supply chain and sales organizations. However, much of this evidence is anecdotal, or is cited as improvement on a company’s internal metrics. The goal of this research is to determine the impact that S&OP implementation has on a company’s public financial and supply chain metrics. By using public records to determine when the company implemented S&OP, and analyzing several key performance metrics for the five year period pre-implementation and post- implementation of S&OP, this study will be able to objectively determine the impact, if any, that the process has on a company’s results. Understanding the impact and the magnitude of effect will enable managers to make better decisions when deciding if and how to implement S&OP in their own organizations. 4 Literature Review S&OP as an Emerging Science In the 1980’s Sales and Operations planning emerged as a way for manufacturers to have a unified production schedule. The process was largely initiated by the manufacturing or materials planning organization and had difficulty convincing sales to become involved (Wallace & Stahl). This was due to a misalignment of both incentives and objectives. With operations seen as a cost center it was their responsibility to keep costs low on the manufacturing line and in inventory levels. On the other hand, the sales organization was motivated by quotas and responsible for selling as much as possible. This incentivizes sales to demand stockpiles of inventory to prohibit any chance of a missed sale and accommodate any customer request with no time barrier. This classic head-butting between the sales and operations side of companies hurt their bottom line and encouraged decision-making at the functional level, rather than the overall business level that would drive economic profit and shareholder value. This was the problem that early Sales and Operations Planning sought to address. Modern S&OP Today the process of Sales and Operations Planning has had its benefits repeatedly extolled in literature and is widely considered to improve corporate performance. It involves almost every member of the business: operations, sales, marketing, distribution, manufacturing, finance, and executive teams. Modern S&OP has even adopted different names in an attempt to capture the full-breadth and new realities, being called Demand-Supply Integration or Integrated Business Planning (Moon). The practice has become so highly regarded that consulting firms specialize entirely on how to best practice and implement S&OP. One major player in that market is the consulting firm Oliver Wight, who in their online publications and books extol the 5 benefits of S&OP. Their claims are backed up by case studies and internal interviews that they have published. Recent academic research also provides insight to the benefits of integrating demand with supply, such as a case study done by professors at the University of Tennessee that through interviews with two large companies saw increases in financial performance and customer service (Tate et al. 2015). According to the book “The New Supply Chain Agenda” effective S&OP processes drive economic profit and increase shareholder value. This is due to avoiding the damaging effects to a business that occur when demand and supply do not match. As the authors write, “When demand exceeds supply, shortages result, expediting costs escalate, customers are often left unhappy, and revenue is left un-realized. When supply exceeds demand, production assets are under-utilized, inventories grow, and costs escalate” (Slone, Dittman, Mentzer). These are just a few of the ways that a mismatch can hurt business. Cumulatively, the body of research above, in both academic and professional settings, it can be determined that all of the popular research done regarding Sales and Operations Planning that has been performed to date regards the process positively. Citing such varied benefits as increased sales, profit, customer service, and even internal collaboration it is a process that can benefit not just manufacturers, but retailers and even service-oriented businesses. Future of S&OP In the future this process will continue to develop relevance in smaller firms, and more globally disparate operations that may have not yet been exposed to it. With new information and technology systems continually improving access to accurate data decisions can be made across organizations in real time that would have been impossible or mere guesses in the S&OP of the 6 1980’s. S&OP excellence is recognized as a competitive advantage today, and will be a necessity for business within the next decade. 7 Methodology 1. Select Companies Selecting the companies to use in this case analysis is the first and one of the most important steps. The first criterion was that the company must be large, with annual revenues in excess of five billion USD, and have publicly available financial information. The second criterion was that their year of implementation would have to be identifiable and within the past 15 years to ensure that the methods, data, and similarities would be consistent. In the same vein, the implementation would have to be completed more than five years prior to 2015, so that enough data would be available post-implementation to find meaningful patterns, if they exist. The selection of companies would also range across industries to gain a broader business perspective of the process. 2. Identify Performance Metrics These results to be analyzed in this case study include: I. Revenue II. Net Income III. Cash Flows IV. Inventory Turns V. Return on Assets These metrics were chosen because they represent the areas where S&OP has been designed to have the most impact. The process is intended to increase revenue by enabling the supply chain to match up with sales and marketing activities. S&OP should also increase net income by reducing costs across the supply chain and sales organization by removing non-value add activities. Cash flows should increase with less capital tied up by inefficient process in 8 manufacturing, distribution, and inventory. Inventory turns should also increase with a successful implementation because the company
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